right of set-off
Definition
The right of set-off gives one party the legal ability to reduce or cancel out a debt they owe by applying a debt that the other party owes them in return. Think of it as two IOUs canceling each other out instead of two separate payments being made. Banks use this right frequently, which is why it matters to small business owners.
Example
If your business owes a bank $10,000 on a loan and that same bank holds $6,000 in your checking account, the bank could use its right of set-off to take that $6,000 and apply it directly to your loan balance without asking your permission first.
Watch Out
Many bank account agreements quietly include a right of set-off clause, meaning the bank can drain your business checking account to cover an unpaid loan or credit card balance, which could leave you unable to pay employees or vendors.
See which terms appear in your contract?
This definition is for informational purposes only and does not constitute legal advice. Please consult with a licensed attorney for legal guidance.